I once used a Shakespeare quotation from Much Ado About Nothing as the basis for an exam question on ethics, moral hazard and conflicts of interest in the real estate investment brokerage sector.
“Let every eye negotiate for itself. And trust no agent.” Discuss.
I was quite pleased with it. But, out of about 40 (students, not questions), not a single one of them did it!
I think that it was the question that spooked them rather than the topic. The investment agency world is opaque and fascinating – especially if you’re acting for buyers. In a lot of other real estate markets, they don’t use buying agents. However, in the UK, it’s standard for investors to buy assets that have been introduced to them by agents who then act on their behalf. So the seller is represented by an agent and the buyer is represented by another agent. It’s interesting that this brokerage model is by no means standard in other countries. We did a piece of research for the IPF last year on comparative liquidity, transaction processes, etc. We found that the UK model was if anything unusual. Similar to the residential market in England, the most common model was a single broker just representing the seller.
In order for such buyers’ agents to earn a fee, they have to win the race to ‘introduce’ a property that is for sale to the most likely buyer. So – to be an effective fee earning buying agent, you need to know as soon as possible when something is for sale and then introduce the asset to the most likely buyer before anyone else can. As you can imagine, networks and relationships are very important. Being first is obviously critical – so there’s lots of scope for ‘helping’ your mates and friendly business associates if you know that something is going to be put on the market. If you are a buyer desperate for access to good quality product, it also helps to know as much as possible about the seller and you want to have the agent with good connections to the seller or their agent. One buyer told me that the ideal buying agent was the selling agent’s best man. They would then be able to have the ‘inside track’ on interested parties, seller preferences etc.
There have been longstanding ethical issues in brokerage – introductions to multiple potential buyers, sellers’ agents accepting late (informed) bids in return for future work from the buying agent or the buyer…lots of potential scams when there is so much at stake, intense competition for hard-to-find product and, in the end, only one winning buyer.
Anyway, the RICS have just released a new Professional Statement (it’s their term) on conflicts of interest in investment agency that tries to address some of the ethical issues in dual agency (acting for both buyer and seller is severely frowned upon), multiple introductions to multiple buyers (ok as long as the agent is transparent with the client but individuals within a firm should not act for competing buyers) and further incremental advice ( ok as long as the agent is transparent with the client and suitable internal information barriers are created.)
It’s to be applauded that the RICS are trying to improve regulation of these conflict of interest issues. They’re behind the curve compared to the IPF here who issued their own guidance in 2014. The IPF’s Protocol on Open Market Investment Agency identified that:
The potential for conflict of interest has become a fact of modern investment agency. Such situations should always be managed proactively and transparently to ensure trust and confidentiality is maintained at all times.
Common governance themes are outlined in the protocol focusing on clarity and fairness in terms of engagement, maintenance of conflicts of interest databases and reference to complaints-handling procedures and redress schemes. Most of the protocol is concerned with multiple introductions and dual agency The protocol emphasises the role of a maintaining a barriers policy that seeks to ensure that deal teams from within the same firm acting for different clients on the same transaction have strict separation of information flows. If you’re really keen, you can even watch videos on the issue at the IPF website.